Thenumber of shares traded in a single day can be greater than the number of a company's outstanding shares, but this is relatively rare. This high trading volume tends to occur during important company events and is more common with companies that have a relatively small float.
Float refers to the company's shares that are available to be freely bought and sold by the public without restrictions. The value of the float can change for several reasons. For example, a company may decide to repurchase its own shares from the market, which would then reduce the number of shares available for purchase by the public. Alternatively, a company may decide to sell authorized shares from its treasury to the public.
High trading volume is usually marked by a large price movement. This essentially means that there is so much buying and selling of shares that a lot of the shares are changing hands in a single day. This does not, however, mean that every shareholder is selling shares while new holders are taking that shareholder's place. In most cases, the high trading volume is due to some factor or trading catalyst that propels the price of the security up or down.
Key Takeaways
- When a stock's trading volume exceeds the number of outstanding shares, it often means a trading catalyst has occurred that is spurring increased buying and selling activity.
- Examples of events that can boost a company's trading volume include a takeover bid, an initial public offering (IPO), and the results from corporate earnings.
- Day traders will often buy and sell shares of the same company multiple times during the same trading session, thus increasing the trading volume so that it exceeds the number of outstanding shares.
- Short-term traders provide the market liquidity required to trade more shares than the actual shares outstanding.
How Day Traders Impact Trading Volume
Companies receive a large amount of market focus and stock activity during important events. Examples of these events include initial public offerings (IPOs), takeover bids, and the announcement of corporate earnings. These events bring the company to the focus of traders—regular traders and day traders—and increase trading volume. The day traders are trying to make a quick buck on the stock's movement by entering and exiting positions with the intention of only holding the shares for a few hours or even minutes.
Longer-term traders, on the other hand, are buying or selling off of the news, which also contributes to the increased stock activity. The day traders or short-term investors provide the liquidity required to trade more shares than the actual shares outstanding. In other words, while a lot of investors who held the shares before an event will not trade on this particular day, it is the day traders and short-termers that trade the shares many times during a trading session.
Day traders can use a number of strategies to make money, including arbitrage, swing trading, trend lines, and candlestick patterns.
How Trading Volume and Shares Outstanding Interact
Let's assume that the number of shares outstanding in a pharmaceutical company is 10 million. Before the market opens, the company announces that its new drug has been approved by the Food and Drug Administration (FDA) to be sold on the market—a huge breakthrough.
Imagine that half of the shareholders do not sell their positions based on the news and continue to hold them. But five million shares are sold on this news throughout the trading session by investors who may feel that the new drug won't bring in much extra business. Or they might be selling simply to lock in any gains they already achieved. And there will be buyers, with different views and aims, who will buy those shares.
All this activity boosts trading volume. If, say, each of the five million shares is each traded 10 times in a day, this would be recorded as a trading volume of 50 million shares, which is five times more than the number of outstanding shares.
This can happen when a lot of new investors—both long and short term—enter the market. So, while not all shares are being actively traded, a fair portion are, and it is these that are being bought and sold multiple times, resulting in more shares traded, or changing hands, than there are shares outstanding.
FAQs
This can happen when a lot of new investors—both long and short term—enter the market. So, while not all shares are being actively traded, a fair portion are, and it is these that are being bought and sold multiple times, resulting in more shares traded, or changing hands, than there are shares outstanding.
What causes high trading volume? ›
An increasing trading volume might be a sign of favorable sentiment, indicating a likely price increase. A falling trading volume might indicate that the market is losing interest. As with other technical indicators, it is important to look at a broad range of metrics before making an investment decision.
What happens when trading volume is high? ›
High volume means shares change hands often, showing market activity and how easy it is to buy or sell. More volume usually means more buyers and sellers. On a trading day, volume is often higher at the start and end when short-term traders act quickly.
How can outstanding shares be higher than issued shares? ›
Issued shares are the total shares issued by the Company. Whereas outstanding shares are the shares with the shareholders, i.e., it does not include the shares repurchased by the Company. Thus, subtracting treasury shares from the issued shares will give outstanding shares.
What is trading volume divided by shares outstanding? ›
Share turnover is calculated by dividing the total number of shares traded over a particular period by the number of shares outstanding during that period. A high share turnover indicates that it is easier for investors to buy or sell the shares of that company in the open market.
What can trading volume tell you? ›
Trading volume, which measures the number of shares traded during a particular time period, can help. While swings in trading volume may not be enough on their own to reveal changes in a trend, they can give you a sense of how much strength there is behind a move.
What are the factors affecting the volume of trade? ›
A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all the factors that affect international trade. These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation, and demand.
What is a bad trading volume? ›
Investing in low volume stocks can put an investor's portfolio at unnecessary risk for a number of reasons. Typically, any stock that trades at fewer than 10,000 shares a day is considered a low-volume stock.
What is considered high trading volume for a stock? ›
There's no specific dividing line between the two. However, high volume stocks typically trade at a volume of 500,000 or more shares per day. Low volume stocks would be below that mark.
What is the best indicator for volume? ›
OBV, MFI, A/D, VWAP and Chaikin Oscillator are some of the most popular volume indicators that are well-known to professional traders.
Day traders will often buy and sell shares of the same company multiple times during the same trading session, thus increasing the trading volume so that it exceeds the number of outstanding shares. Short-term traders provide the market liquidity required to trade more shares than the actual shares outstanding.
What causes shares outstanding to increase? ›
Treasury shares plus outstanding shares equal the total number of shares issued. Shares outstanding may increase if a startup undertakes a stock split. So, it is essential to calculate the number of shares outstanding after a stock split.
Is high shares outstanding good or bad? ›
Are More Shares Outstanding Good or Bad? Shares outstanding is just the amount of all the company's stock that's in the hands of its stockholders. By itself, it is not intrinsically good or bad.
What is the difference between shares outstanding and trading volume? ›
The trading volume is the average number of shares traded in a given period. Many exchanges or financial information websites will provide this information for any given security. The second number is the average shares outstanding. This is the total number of shares of a stock a company has issued.
How to solve outstanding shares? ›
The formula for calculating Outstanding Shares = Total Issued stock - Treasury shares. So, in the above example, the outstanding shares of FoodZilla Ltd would be 8,000 shares with 2,000 shares as treasury shares.
What happens when stock volume increases? ›
Volume measures the number of shares traded in a stock or contracts traded in futures or options. Volume can indicate market strength, as rising markets on increasing volume are typically viewed as strong and healthy. When prices fall on increasing volume, the trend is gathering strength to the downside.
What does a large trading volume mean? ›
Think of volume as a thermometer, gauging the temperature of investor interest in a particular stock. High trading volume indicates significant investor interest and liquidity, meaning you can buy or sell shares with minimal price impact. Low volume, on the other hand, might suggest investor apathy.
Does high volume mean bullish? ›
Volume can indicate market strength, as rising markets on increasing volume are typically viewed as strong and healthy. When prices fall on increasing volume, the trend is gathering strength to the downside.
Why is trading volume high at the end of the day? ›
Volume tends to pick back up at the end of the day, as institutional investors look to close out positions or enter new ones.
What causes excessive trading? ›
Take a break: Overtrading may be caused by investors feeling as though they have to make a trade. This often results in less-than-optimal trades being taken that result in a loss. Taking time off from trading allows investors to reassess their trading strategies and ensure they fit their overall investment objectives.
